Mind to Market

Sunday, January 28, 2007

Healthcare's Portion of GDP

The U.S. Centers for Medicare and Medicaid Services recently published their health expenditure data for 2005 indicating what we all expected; that healthcare costs continue to rise. But what is perhaps even more pertinent is the rise in the percentage of the GDP healthcare consumes; 16% in 2005 up from 15.9% in 2004 and 13.7% a decade ago. At 16%, the U.S. leads the world in the percentage of our GDP we spend on healthcare, second place Germany spends 10.5%. This means we either have the absolute best healthcare in the world or a pretty inefficient way of providing healthcare to our citizens. The Organization for Economic Cooperation and Development which monitors metrics in determining the health of a country, such as life expectancy and infant mortality, do not indicate the former.

The implication then is that the healthcare system is inefficient. This of course is the topic of many a debate in the government and healthcare industries but what is not under debate is the aging of the baby boomers, now reaching their 60's, and the ensuing increase in demand for healthcare services that they will require. With the healthcare system in its current state I see healthcare costs per capita continuing to rise at least for the next decade. Justin Lahart in his column Ahead of the Tape in the WSJ has suggested that Washington and state capitals will focus on the problem and thus bring the price down. How? The White House plan is to move toward the free market approach; allow the consumers to pick up a higher share of the costs of their healthcare which will in turn put pressure on providers to become more competitive. This entails the reduction in tax breaks on generous healthcare plans provided by some employers to their employees. Economists point out that this encourages these people to use excessive amounts of healthcare which drives up the overall costs.

Under the White House plan health benefits would be considered income and subject to income and payroll taxes. There would, however, be a deduction of $15,000 per family per year or $7,500 per individual. The same deduction would be available whether the coverage came from an employer or the individual.

Although many details still need to be worked out in this plan, making the consumer more responsive to healthcare costs is certainly the free market approach to controlling ever increasing healthcare costs. In a true free market of course, the consumer would negotiate the costs directly with the provider thus putting pressure on the provider to keep costs in check. But with the high costs of healthcare and its extremely variable distribution among the population, a third party payer system seemed like the most reasonable way to handle the situation. This system has short-circuited the free market checks and balances which has reduced competition among healthcare providers and thus reduced their need in seeking efficiencies in keeping costs down. The result is as expected: costs in healthcare have risen faster than the of costs in the economy as a whole without a commensurate rise in healthcare quality. Although providers may be assumed to have the best of intentions, only economic pressures will force them to make the hard choices required to reduce waste and improve efficiency.

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